IRS Releases Qualified Improvement Property (QIP) Guidance

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The IRS has issued guidance to address legislative changes in the CARES Act. QIP placed in service in 2018 and later is now eligible for bonus depreciation and has a GDS life of 15 years (20-years ADS).

The CARES Act, signed into law on March 27, 2020, contained a few tax surprises, including fixing the “retail glitch.” The retail glitch is the term used for language omitted in the Tax Cuts and Job Act (TCJA) that would have made QIP eligible for bonus depreciation. Under the TCJA, QIP placed in service after December 31, 2017, had a GDS estimated life of 39 years (40 years for ADS).

Since the CARES Act retroactively amends the TCJA for the tax treatment of QIP, the IRS needed to address:

  • the use of a 39-year (or 40-year) life for QIP, which is now an impermissible depreciation method;
  • tax returns already filed for the 2018 and 2019 tax years; and,
  • bonus depreciation or the election out of bonus.

On April 17, 2020, the IRS issued Revenue Procedure 2020-25 to offer guidance in these areas for taxpayers who placed QIP in service for the tax years 2018, 2019, and 2020.  In addition, bonus depreciation election/revocation relief is provided for these tax years.

Areas Addressed by the Guidance

Section 3 of Rev Proc 2020-25 covers changing the depreciable life of QIP, but does not apply to:

  1. QIP where elections were made or revoked under Rev Proc 2020-22 sections 4.02, 4.03, or 5.02. This item is a reference to the rules under IRC 163(j) business interest deductions.
  2. “Qualified improvement property for which the taxpayer deducted or deducts the cost or other basis of such property as an expense.” This refers to Section 179 deductions, for example.

Section 4 covers the extension of time to file certain elections (i.e. late election) for bonus depreciation and ADS. Section 5 allows for the late revocations for bonus depreciation and ADS. Both of these sections address the option for making late elections or revocations for qualifying property placed in service 2018, 2019, 2020:

  • IRC Section 168(g)(7) - MACRS alternative depreciation system (ADS) election
  • IRC Section 168(k)(5) - election to claim bonus depreciation for specific plants that are planted or grafted before January 1, 2027
  • IRC Section 168(k)(7) - election out of bonus depreciation for any class of property
  • IRC Section 168(k)(10) - qualifying property for which the taxpayer elects to take 50% bonus instead of the 100% bonus depreciation rate for all bonus depreciation property placed in service in a tax year that includes September 28, 2017

How to Apply the Changes

Most taxpayers have two options: file amended tax returns or do a change in accounting method by filing a Form 3115.  Since the rules for partnerships can be more complex, review Rev Proc 2020-25 and Rev Proc 2020-23 for more detailed information.

Amended returns

  • Can only be filed for one year at a time
  • Can include changes for other items
  • Due by April 17, 2021, or if extended, by October 15, 2021

Form 3115

  • Can file one form to adjust for one or multiple prior years
  • Automatic method changes (such as changing from an impermissible depreciation method) don’t require a filing fee.
  • The DCN automatic change number related to QIP depreciation method change is 244
  • The DCN automatic change number related to late or revoked bonus elections is 245

Next Steps

If you want to know more about Section 481(a) adjustments and Form 3115 as well as a broad discussion on options for adjusting filed tax returns or returns yet to be filed, see How the CARES Act Changes QIP and Tax Returns

For information about how to make QIP adjustments in Sage Fixed Assets – Depreciation, see Breaking News: Qualified Improvement Property Now Has a 15-year Life!

Note: The list of DCNs (Designated automatic accounting method change number) appear at the end of the Form 3115 Instructions. As of April 24, 2020, the instructions had not been updated.